02 Jan, 2018 (Updated 10 Jan, 2018)
Nordea’s AutoFX “currency robot” optimises payment flows to reduce the interest costs and administrative work at Volati.
It wouldn’t be possible for us to do this manually
Volati AB (publ) is a listed Swedish industrial group that acquires well-managed companies considered to have reasonable valuations and develops them with a focus on long-term value creation. Its 14 holdings include book retailer Akademibokhandeln and Besikta, a vehicle inspection company. The Group has total sales of SEK 5.6 billion and more than 1,700 employees in 16 countries.
Twelve people work at the company’s headquarters in Stockholm, where the Group-wide Treasury function is based. CFO Mattias Björk works with liquidity planning and funding as well as with optimising the companies’ payment flows in the various currencies.
“Our subsidiaries own their income statements, while the Group owns the balance sheet and manages all external funding,” Björk says. “In order for this arrangement to work, the parent company must have access to the subsidiaries’ liquidity.”
Global cash pool
Volati has therefore created a global cash pool for its operations. The majority of the subsidiaries’ bank accounts are linked to this cash pool, with a total of nine different currencies flowing in and out.
“The 14 subsidiaries are located in 16 countries and have different business and financial systems, and they also have different types of operations that result in different types of liquidity flows,” Björk explains. “Having all of this combined results in a huge amount of flows in different currencies.”
Volati turned to Nordea to find a cost- and resource-efficient solution to gain control of its currency flows and manage the Group’s risk by avoiding unnecessary currency exposure. The Group also wanted to minimise its interest costs.
Creating an in-house system to make short- and long-term liquidity forecasts for the various currencies and to efficiently manage the common cash pool would be too resource-intensive, Björk says. “Forecasting all of the flows in each currency at a reasonable cost would be impossible,” he says. “We’re a decentralised organisation and have only 12 employees at the parent company level. For us to be able to handle a balance sheet of more than SEK 4 billion would require a high degree of automation.
“We sat down with Nordea to see what system tools could help us to gain control over our currency flows, while ensuring that we pay as little as possible in interest. Interest rates may be low right now, but every little bit counts, and what happens when rates change? Then we’ve already hedged our cash flows.”
We simulated a three-month period to see how much we succeeded in lowering our interest costs using AutoFX and the swaps it carried out, and it was a substantial amount, Mattias Björk, CFO Volati.
Currency robot acts on algorithms
Volati has done this with the assistance of Nordea’s AutoFX automated solution, which uses algorithms based on an aggregate picture of Volati’s trending flows in the various currencies. AutoFX carries out currency transactions with different instruments aimed at ensuring an optimal balance in the various currency accounts, taking into account existing positions and future payment flows. Björk explains one of the advantages.
“For example, a positive balance of US dollars in the dollar account today gives a very low interest rate, and may even mean a negative rate in other currencies,” he says. “Or let’s say you have a positive balance in your SEK account and a negative balance in the USD account. In terms of interest, you can’t offset these positions against each other. The solution is an instrument called a currency swap, which means you swap your dollar position for an SEK position during a certain time period. Then you minimise the total interest to be paid. Instead of borrowing money to cover the negative balance, you use the temporary positive balance in another currency. It’s less expensive and it takes place automatically using AutoFX.”
Can’t you just exchange the surplus and transfer the money to the account with the deficit?
“Yes, but that would involve an exchange transaction fee, and it would also mean unnecessary currency exposure that I’m not interested in risking,” Björk explains. “Our business concept involves acquiring and developing well-managed companies, not currency speculation. By using AutoFX, which carries out currency transactions for the equivalent of SEK 27 billion per year, we don’t have to actively take any decisions on corrective measures.”
AutoFX reconciles the Group’s currency flows daily, reports the balances and ensures that the currency positions are neutralised using instruments such as currency swaps, forwards and spot transactions.
“We used to do this manually once a week, but it required far too much of our time and resources,” Björk says.
Frees up time for growth
So how has Volati benefitted from AutoFX?
“We simulated a three-month period to see how much we succeeded in lowering our interest costs using AutoFX and the swaps it carried out, and it was a substantial amount,” Björk says. “In purely financial terms, implementing AutoFX has been a good deal for us, just on interest savings alone. We’re also undergoing strong growth and wouldn’t have had the capacity to pursue our growth without AutoFX relieving the burden. Of course you can execute transactions like swaps manually, but just sitting and posting them would have taken plenty of time.”
For the individual subsidiaries, Björk explains, relieving their workload has freed up time for them to develop their businesses. “We program the currency robot ourselves here at Volati using our analysis of long-term flows,” he says. “But after that we can sit back and not worry about expensive negative balances or unnecessary positive balances in the currencies that the companies use.”
Volati has now integrated AutoFX with its business systems, which enables it to take care of posting and reporting all of its currency transactions.
“We really have received a fully automated solution,” Björk says. “All that we do manually is to occasionally go in and conduct an analysis to ensure that the parameters are correctly set so that the robot can carry out the ‘right’ transactions.”
Facts: Volati’s challenges and the AutoFX solution:
- On an annual basis, the Group has about SEK 27 billion in flows via AutoFX. The majority are currency swaps.
- On an annual basis Volati carries out almost 2,000 currency transactions using AutoFX.
- Volati’s global cash pool includes nine currencies, but the majority of the flows are denominated in EUR, SEK, NOK, DKK and USD, with more limited flows in PLN, JPY, GBP and the Chinese CNH.
3 questions to Christian Hjalmarsson, FX Analyst
Why did you recommend Nordea AutoFX to Volati?
“We felt that AutoFX was a perfect solution for Volati, since they have such a clear focus on their core business. Although currency and liquidity management often occupy a large portion of daily life for a CFO, we quickly understood that being buried in manual account reconciliations and Excel lists was not the way that the company wanted to spend its time and create value.”
What do you think of the result?
“Of course we’re pleased that AutoFX has made it possible for Volati both to automate its manual procedures and to cut costs as a result, while also optimising liquidity management.”
How can I find out if AutoFX is the right solution for me?
“If you’d like to know more about AutoFX, or wonder what it can do for your company, just get in touch with your customer service representative at Nordea Markets. You can also read more about AutoFX here.”
It is important that you understand how different instruments work before you begin trading. Read more about currency swaps and currency risk management here.
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